Credit Connect

The UK government needs to kick-start its stalled corporate insolvency reforms in the wake of the UK insolvency framework falling from 13th to 14th in the World Bank’s rankings according to insolvency and restructuring trade body, R3.

R3 is warning that with other countries’ insolvency and restructuring frameworks improving, and with Brexit potentially creating barriers to resolving cross-border insolvencies from the UK, the UK is at risk of seeing its current competitive advantage in international insolvency and restructuring diminish unless reform efforts are renewed. A less competitive insolvency framework would have a detrimental impact on the wider economy.

The government announced insolvency reforms in May 2016, but limited progress has been made since. The government is yet to respond to its own ‘call for evidence’ on the reforms, which closed in July 2016, while plans for reform were absent from the Queen’s Speech earlier this year.

Adrian Hyde, R3 President, said “Corporate insolvency reform should be a priority for the UK. We currently have a world-class insolvency and restructuring framework, but we can’t stand still. Others are catching up to us and over-taking. EU member states and places like Singapore have embarked on ambitious insolvency reform projects in a bid to tempt investment and businesses to their countries.”

“Meanwhile, the UK government has gone cold on its own reforms, and Brexit risks making it harder to resolve the insolvencies and restructurings of large, multi-national companies from the UK. Insolvency reform would be a welcome step to making sure the UK economy is prepared for Brexit. It’s not something we can leave until after we have left. That might be too late.”

“An effective insolvency and restructuring framework is an absolutely vital part of any economy. It helps rescue businesses and jobs, and provides lenders, investors and trade creditors with confidence that they can get at least some of their money back when things go wrong. The flexibility and practicality which underpin the UK’s insolvency and restructuring framework help to attract business to the UK; if we don’t continue to improve the framework, the whole economy will suffer.”

Countries which have improved their insolvency frameworks recently are rising in the rankings. The Netherlands has moved from 11th last year to 8th this year; the UK has been overtaken by Canada (15th to 12th) and Iceland (14th to 13th).

WB Resolving Insolvency rankings

2016

2017

Japan

2

1

Finland

1

2

US

5

3

Germany

3

4

S. Korea

4

5

Norway

6

6

Denmark

8

7

Netherlands

11

8

Puerto Rico

9

9

Slovenia

12

10

Belgium

10

11

Canada

15

12

Iceland

14

13

UK

13

14

The government’s 2016 reform package included:

Plans to give directors last-chance protection from creditors before an insolvency procedure to allow them to put in place a rescue plan;

Reforms to ensure businesses in a rescue procedure continue to receive vital supplies; and

The introduction of a new court-based restructuring procedure, similar to the US’s Chapter 11 bankruptcy proceedings.

Hyde says: “R3 welcomed the government’s reforms when they were first proposed, and with some alterations they could make a valuable addition to the UK’s business landscape, making the UK an attractive place to do business for both domestic and international businesses and investors. The reforms could increase the chances of business and job rescue, which would often, in turn, boost returns to creditors. They would also introduce procedures to the UK with which international investors are familiar and which they increasingly expect to see in place.”

“Reform would help the UK keep up with the minimum international standards, while allowing the UK’s attractive creditor-focused insolvency framework to continue to differentiate our economy to companies and investors from debtor-focused alternatives.”

As an EU member the UK benefits from key EU Regulations which mean UK insolvency and restructuring procedures and judgments are recognised across the EU (and vice versa). This means a UK insolvency practitioner can trace, secure, and realise assets of an individual or multi-national company across the EU without having to apply for recognition in individual countries first.

Before the introduction of the Regulations, the process of seeking recognition was time-consuming, costly, and unpredictable: local courts might not recognise an overseas insolvency appointment or have time to hear the case.

Adrian Hyde continues “While the UK is in the EU, working on a European cross-border case is relatively simple and cost-effective. Without automatic recognition, however, it might not be viable to run some cases from the UK. It might just be too expensive or risky.”

In a recent survey, almost 2-in-5 R3 members said they had cases which they would have been unwilling or unable to take on without automatic recognition.

In its August 2017 paper on post-Brexit civil justice co-operation, the government said it would seek an agreement with the EU which was similar to the existing framework of reciprocal recognition.

“We welcome the government’s stance on reciprocal recognition: the continuation of the benefits of the existing framework would minimise the impact of Brexit on the UK insolvency framework’s effectiveness. However, we also need the EU to agree to that deal. While the EU would also benefit from the continuation of reciprocal recognition, we just don’t know where it stands on this issue.”

The World Bank Statistics – explained

The UK had been 13th in the World Bank’s rankings since the current methodology was first used (in the 2015 report).

Despite the fall in the most recent rankings, the World Bank statistics show the UK insolvency and restructuring framework continues to return more money to creditors, more rapidly and more cheaply compared to the insolvency frameworks of other major economies including the US, Germany and France.

The World Bank scores insolvency frameworks on: their recovery rate for creditors; the time taken to resolve insolvencies; the cost of insolvencies; whether businesses and companies can be rescued; the strength of the framework; the ease of commencing proceedings; how debtors’ assets are managed; creditor participation; and the ease of restructurings.

Separately, a June 2017 OECD report found the UK’s insolvency framework was the OECD’s best for dealing with ‘zombie companies’ – those companies which are avoiding insolvency but which have few long-term prospects for growth. However, the report noted several instances of other countries reforming to catch up to the UK.